1. RICHARD G. SCHROEDER MYRTLE W. CLARK JACK M. CATHEY
FINANCIAL ACCOUNTING
THEORY AND ANALYSIS: TEXT AND CASES
11TH EDITION
RICHARD G. SCHROEDER
MYRTLE W. CLARK
JACK M. CATHEY 4

2. LONG TERM ASSETS I: PROPERTY, PLANT AND EQUIPMENT
CHAPTER 9
LONG TERM ASSETS I: PROPERTY, PLANT AND EQUIPMENT

3. Property, Plant, and Equipment
Represent a major source of future service potential
Valuation is important because
Indication of physical resources available to the firm
May give some indication of future liquidity and funds flow.

4. Accounting Objectives
Accounting and reporting to investors on stewardship
Accounting for the use and deterioration of plant and equipment
Planning for new acquisitions through budgeting
Supplying information for taxing authorities
Supplying rate-making information for regulated industries

5. Accounting for Cost
Initial cost: sacrifice of resources given up now to accomplish future objectives
Preferred measurement technique: discounted present value of future receipts
Indicates future services potential

6. Accounting for Cost Some problems Group purchases
Self constructed assets
Removal of existing assets
Non-monetary exchange
Donated or discovery values

7. Group Purchases
Total acquisition cost must be allocated to the individual assets
Usual method:
Base the allocation on the relative fair market values

8. Self Constructed Assets
What is cost?
Include all incremental costs
Allocation of fixed overhead
None
Incremental
Same basis as other products
Interest
SFAS No 34 (FASB ASC ) issues
The concept of qualified assets
The amount to capitalize

9. Removal of Existing Assets
Charge removal cost less proceeds to cost of land

10. Assets Acquired in Noncash Transactions
APB No. 29 (FASB ASC 845)
Fair value for most
Book value when the exchange is not the culmination of the earnings process
Recording gains and losses on nonmonetary assets with Commercial substance under SFAS 153
Definition
Record at book value 10

11. Donated and Discovery Values
How they occur
Accounting Under SFAS No. 116 (FASB ASC ) 11

12. Financial Analysis of Property Plant and Equipment
The impact of PP & E on the return on assets ratio
Sustainability of earnings
Evaluating a company’s replacement of assets policy

13. Financial Analysis of Property Plant and Equipment

14. Financial Analysis of Property Plant and Equipment

15. Financial Analysis of Property , Plant and Equipment
The companies’ return on assets percentages are not being distorted by a failure to systematically replace their long-term assets

16. Cost Allocation Capitalization implies future service potential
Matching concept requires expiration of future service potential to be recorded in the period incurred
“Cost allocation”
Actual expiration of future service potential difficult to ascertain
Method of cost allocation should be systematic and rational
Depreciation is a form of cost allocation

17. The Depreciation Process
Issues:
Establishing the proper depreciation base
Determining useful service life
Choosing a cost allocation method
Straight-line
Accelerated
Units of Activity

18. Capital Vs. Revenue Expenditures
Whether to capitalize
or charge to expense
expenditures required for an existing long-term asset
Criteria
Prolong life or increase efficiency
Ordinary and necessary
Capitalize
Expense

19. Recognition and Measurement Issues
User needs are currently not being satisfied
Suggests a current value approach

20. Future cash flows < Book value
Impairment of Value
Long-term asset accounting should be similar to accounting for other assets
Asset should be written down when value diminishes
SFAS No.121
Impairment occurs when carrying amount is not recoverable
Future cash flows < Book value
Recognize loss when book value is not recoverable

21. SFAS No. 144: Accounting for the Impairment or Disposal of Long-Lived Assets
Why?
Issued because SFAS No. 121 did not address accounting for a segment of a business accounted for as a discontinued operation under APB Opinion 30.
Consequently, two accounting models existed for long-lived assets to be disposed of.
The Board decided to establish a single accounting model
Based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale.

22. SFAS No. 144: Accounting for the Impairment or Disposal of Long-Lived Assets (See FASB ASCs to 49)
Applies to all dispositions of long-term assets
Excludes current assets, intangibles and financial instruments because they are covered in other releases.
According to its provisions assets are to be classified as:
Long-term assets held and used
Long-lived assets to be disposed of other than by sale
Long-Lived Assets to Be Disposed Of by Sale

23. SFAS No. 144: Accounting for the Impairment or Disposal of Long-Lived Assets
Long-term assets held and used are to be tested for impairment using the SFAS No. 121 criteria if events suggest there may have been an impairment.
The impairment is to be measured at fair value by using the present value procedures outlined in SFAC No. 7.
For long-term assets held and used, it might be necessary to review the original depreciation policy to determine if the useful life is still as originally estimated.

24. SFAS No. 144 (FASB ASC 360): Accounting for the Impairment or Disposal of Long-Lived Assets
Next the assets are grouped at the lowest level for which identifiable cash flows are independent of cash flows from other assets and liabilities
Losses are allocated to the assets in the group on a pro-rata basis.
Any losses are disclosed in income from continuing operations

25. SFAS No. 143 (FASB ASC 410-20): Accounting for Asset Retirement Obligations
Objective: to provide accounting requirements for all obligations associated with the removal of long-lived assets
For each asset retirement obligation
Initially record the fair value (present value) of the liability to dispose of the asset when a reasonable estimate of its fair value is available.
Required to use SFAC No. 7 criteria for recognition of the liability
Present value of the asset at the credit adjusted rate.
Defined as the amount a third party with a comparable credit standing would charge to assume the obligation.

26. SFAS No. 143 (FASB ASC 410-20): Accounting for Asset Retirement Obligations
Capitalized asset retirement cost
Allocated in a systematic and rational manner as depreciation expense over the estimated useful life of the asset.
Initial carrying value of the liability
Increased each year by use of the interest method
Using the credit adjusted rate
Classified as accretion expense and not interest expense.

27. International Accounting Standards
The IASB has issued pronouncements on the following issues:
The overall issues associated with accounting for property, plant, and equipment assets in a revised IAS No. 16, "Property, Plant and Equipment."
Interest capitalization in IAS No. 23, “Borrowing Costs.
Impairment of Assets in IAS No. 36, “Impairment of Assets.”
Accounting for Investments in Property in IAS No 40, “Investment Properties.”
The accounting treatment for assets held for disposal in IFRS No. 5, “Non-Current Assets Held for Sale and Discontinued Operations.”

28. IAS #16: Property, Plant and Equipment
Revised IAS No. 16 did not change the fundamental approach to accounting for property plant and equipment.
Recognize items as assets when economic benefit will flow to enterprise and cost can be measured
Preference is to depreciate historical cost of assets
Allows revaluations to current market value
Requires recording of impairments
Depreciation charge should reflect pattern of benefits
If change in pattern of benefits is noted, change depreciation method to reflect new pattern

29. IAS #16: Property, Plant and Equipment
The major clarifications in revised IAS No. 16:
Requiring a components approach for depreciation
The acquisition cost of property, plant, and equipment should include
Amount of an IAS 37 provision for the estimated cost of dismantling and removing the asset and restoring the site
Include both provisions when the asset is acquired and incremental provisions recognized while the asset is used
Accounting for incidental revenue (and related expenses) during construction or development of an asset will depend on
Whether the incidental revenue is a necessary activity in bringing the asset to the location and
Working condition necessary for it to be capable of operating in the manner intended by management

30. IAS #16: Property, Plant and Equipment
Measurement of residual value defined:
The current prices for assets of a similar age and condition to the estimated age and condition of the asset when it reaches the end of its useful life.
Exchanges of similar items of property, plant, and equipment
Recorded at fair value
Gain or loss will be recognized
Unless neither the fair value of the asset given up nor the fair value of the asset acquired can be measured reliably
Subsequent expenditure is capitalized only if the expenditure increases the asset's future economic benefits above those reflected in its most recently assessed level of performance

31. IAS No. 23: Impairment of Assets
Requires:
An impairment loss to be recognized on items of property, plant and equipment
Whenever the recoverable amount of an asset is less than its book value
The recoverable amount is the higher of
Asset’s selling price
Or value in use (present value of future cash flows)
Revised 2007: Removed option of immediately recognizing all borrowing costs as expense

32. IAS No. 36
Make sure assets are carried at no more than recoverable amount
Define how recoverable amount is calculated

33. IAS No. 40: Investment Property
Defined as land or buildings held to earn rentals or for capital appreciation
May account by either:
Fair value with changes reflected in income

34. IFRS No. 5: Non-Current Assets Held for Sale and Discontinued Operations
Establishes a classification for non-current assets 'held for sale'
Using the same criteria as those contained in US FASB Statement 144 Accounting for the Impairment or Disposal of Long-Lived Assets.
Therefore, operations that are expected to be wound down or abandoned would not meet the definition
But may be classified as discontinued once abandoned.

35. IFRS No. 6: Exploration & Development Assets
Required to be measured initially at cost.
Typical allowable expenditures:
Topographical, geological, geochemical, and geophysical studies
Exploratory drilling, trenching, sampling

36. Prepared by Kathryn Yarbrough, MBA
End of Chapter 9
Prepared by Kathryn Yarbrough, MBA
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